No Service Tax on Services by Incorporated Clubs to Members, rules Supreme Court [Read Judgment]

The Supreme Court of India in the case of State of West Bengal v Calcutta Club Ltd. ruled that services rendered by incorporated clubs to members are exempted from service tax.

The Assistant Commissioner of Commercial Taxes in a notice issued to the Respondent Club assessee on the ground that they had failed to make payment of sales tax on the sale of foods and drinks to the permanent members during the quarter ending 30-06-2002. It was contended on behalf of the assessee that they are not a dealer within the definition of the Act and there could be no sale by them to their own permanent members, for the doctrine of mutuality would come into play. Further, the assessee treated itself as the agent of the permanent members in entirety and contended that no consideration was passed for supplies of food, drinks or beverages, etc. and it amounted to reimbursement. The Hon’ble Tribunal hence held that the assessee Club is not eligible to tax on the contentions raised.

The issue before the Apex Court was whether service tax shall be applicable to services rendered by incorporated clubs to members exempted from service tax (and if there is a change in the position of law after the 46^th Constitutional Amendment).

It was contended on behalf of the revenue that the doctrine of mutuality, based on common law principles that a person cannot make a profit from himself, was ruled away with the introduction of the 46^th Constitutional Amendment.

The Bench constituting of Justice R.F. Nariman, Justice Surya Kant and Justice V. Ramasubramanian held while referring to the Statement of Objects and Reasons that sub-clause (f) to Article 366 of clause 29-A (which permits the States to impose a tax on the supply of food and drink) does not include ‘goods’ in their entirety. Upholding the position laid in Young Men’s Indian Association it was held that supply of various preparations by each club to its members would not amount to a transfer of property from one to another and hence there would be no sale eligible to tax. The club would only act as an agent for its members even if the club is a distinct legal entity and hence the Doctrine of Mutuality subsists.

It has been held that members’ clubs stand on a different footing from proprietary clubs due to the absence of two parties (i.e. seller and buyer). On the issue of application of service tax, it has been accepted by the Court that incorporated clubs or associations prior to July 1^st, 2012 were not included in the service tax net and due to existence of the same terminology i.e. ‘body of persons’ after the 2012 amendment, the position pre-2012 was upheld.